================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 5, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-20243
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VALUEVISION MEDIA, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1673770
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6740 Shady Oak Road, Eden Prairie, MN 55344
(Address of principal executive offices)
952-943-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large Accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of September 11, 2006, there were 37,799,081 shares of the registrant's
common stock, $.01 par value per share, outstanding.
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
AUGUST 5, 2006
PAGE OF FORM
10-Q
------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
-Condensed Consolidated Balance Sheets as of August 5, 2006
and February 4, 2006 3
-Condensed Consolidated Statements of Operations for the
Three and Six Month Periods Ended August 5, 2006 and
July 30, 2005 4
-Condensed Consolidated Statement of Shareholders' Equity
for the Six Month Period Ended August 5, 2006 5
-Condensed Consolidated Statements of Cash Flows for the
Six Month Periods Ended August 5, 2006 and July 30, 2005 6
-Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 24
Item 4. Controls and Procedures 24
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits 26
Signatures 27
Exhibit Index 28
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
AUGUST 5, FEBRUARY 4,
2006 2006
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 39,141 $ 43,143
Short-term investments 35,754 39,207
Accounts receivable, net 93,273 87,478
Inventories 70,372 67,844
Prepaid expenses and other 8,731 8,357
--------- ---------
Total current assets 247,271 246,029
PROPERTY & EQUIPMENT, NET 44,562 46,958
FCC BROADCASTING LICENSE 31,943 31,943
NBC TRADEMARK LICENSE AGREEMENT, NET 13,848 15,461
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 2,207 2,654
OTHER ASSETS 4,832 4,094
--------- ---------
$ 344,663 $ 347,139
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 56,833 $ 60,597
Accrued liabilities 42,585 40,223
--------- ---------
Total current liabilities 99,418 100,820
LONG-TERM CAPITAL LEASE OBLIGATIONS 139 130
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.01 PER SHARE PAR VALUE, 5,339,500 SHARES AUTHORIZED;
5,339,500 SHARES ISSUED AND OUTSTANDING 43,462 43,318
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares authorized;
37,799,082 and 37,643,676 shares issued and outstanding 378 376
Warrants to purchase 6,036,858 and 6,380,583 shares of common stock 32,854 34,029
Additional paid-in capital 280,845 278,266
Deferred compensation -- (154)
Accumulated deficit (112,433) (109,646)
--------- ---------
Total shareholders' equity 201,644 202,871
--------- ---------
$ 344,663 $ 347,139
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
FOR THE THREE MONTH PERIODS ENDED FOR THE SIX MONTH PERIODS ENDED
--------------------------------- -------------------------------
AUGUST 5, JULY 30, AUGUST 5, JULY 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net sales $ 186,982 $ 169,492 $ 365,706 $ 322,968
Cost of sales (exclusive of depreciation and
amortization shown below) 121,755 109,798 237,277 211,976
----------- ----------- ----------- -----------
Gross profit 65,227 59,694 128,429 110,992
----------- ----------- ----------- -----------
OPERATING EXPENSE:
Distribution and selling 55,492 50,730 110,401 100,618
General and administrative 7,057 6,191 13,863 12,439
Depreciation and amortization 5,374 5,026 10,750 10,131
Asset impairments and write offs -- -- 29 --
Employee termination costs -- -- -- 82
----------- ----------- ----------- -----------
Total operating expense 67,923 61,947 135,043 123,270
----------- ----------- ----------- -----------
OPERATING LOSS (2,696) (2,253) (6,614) (12,278)
----------- ----------- ----------- -----------
OTHER INCOME:
Other income (expense) -- (256) 350 (1)
Interest income 1,015 743 1,961 1,406
----------- ----------- ----------- -----------
Total other income 1,015 487 2,311 1,405
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND EQUITY IN
INCOME OF AFFILIATES (1,681) (1,766) (4,303) (10,873)
Equity in income of affiliates 1,000 14 1,546 14
Income tax (provision) benefit (15) 826 (30) 820
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (696) (926) (2,787) (10,039)
DISCONTINUED OPERATIONS:
Loss from discontinued FanBuzz operations,
net of tax (Note 13) -- (493) -- (2,076)
----------- ----------- ----------- -----------
NET LOSS (696) (1,419) (2,787) (12,115)
Accretion of redeemable preferred stock (72) (71) (144) (143)
----------- ----------- ----------- -----------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (768) $ (1,490) $ (2,931) $ (12,258)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE:
Continuing operations $ (0.02) $ (0.03) $ (0.08) $ (0.27)
Discontinued operations -- (0.01) -- (0.06)
----------- ----------- ----------- -----------
Net loss $ (0.02) $ (0.04) $ (0.08) $ (0.33)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE - ASSUMING DILUTION:
Continuing operations $ (0.02) $ (0.03) $ (0.08) $ (0.27)
Discontinued operations -- (0.01) -- (0.06)
----------- ----------- ----------- -----------
Net loss $ (0.02) $ (0.04) $ (0.08) $ (0.33)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding:
Basic 37,736,419 37,102,001 37,707,761 37,089,737
=========== =========== =========== ===========
Diluted 37,736,419 37,102,001 37,707,761 37,089,737
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTH PERIOD ENDED AUGUST 5, 2006
(Unaudited)
(In thousands, except share data)
COMMON STOCK COMMON
----------------- STOCK ADDITIONAL TOTAL
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN DEFERRED ACCUMULATED SHAREHOLDERS'
LOSS OF SHARES VALUE WARRANTS CAPITAL COMPENSATION DEFICIT EQUITY
------------- ---------- ----- -------- ---------- ------------ ----------- -------------
BALANCE, FEBRUARY 4, 2006 37,643,676 $376 $34,029 $278,266 $(154) $(109,646) $202,871
Net loss $(2,787) -- -- -- -- -- (2,787) (2,787)
=======
Exercise of stock options and
common stock issuances 155,406 2 -- 878 -- -- 880
Stock purchase warrants forfeited -- -- (1,175) 1,175 -- -- --
Share-based payment compensation -- -- -- 824 -- -- 824
Effect of accounting change
(SFAS 123R) -- -- -- (154) 154 -- --
Accretion on redeemable preferred
stock -- -- -- (144) -- -- (144)
---------- ---- ------- -------- ----- --------- --------
BALANCE, AUGUST 5, 2006 37,799,082 $378 $32,854 $280,845 $ -- $(112,433) $201,644
========== ==== ======= ======== ===== ========= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
FOR THE SIX MONTH
PERIODS ENDED
--------------------
AUGUST 5, JULY 30,
2006 2005
--------- --------
OPERATING ACTIVITIES:
Net loss $(2,787) $(12,115)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 10,750 10,393
Share-based payment compensation 824 --
Common stock issued to employees 8 13
Amortization of deferred compensation -- 98
Asset impairments and write offs 179 400
Equity in earnings of affiliates (1,546) (14)
Gain on sale of property and investments (500) (5)
Noncash tax benefit -- (832)
Changes in operating assets and liabilities:
Accounts receivable, net (5,795) (3,981)
Inventories (2,528) (12,967)
Prepaid expenses and other (21) (517)
Accounts payable and accrued liabilities (1,230) 13,703
------- --------
Net cash used for operating activities (2,646) (5,824)
------- --------
INVESTING ACTIVITIES:
Property and equipment additions (5,954) (3,879)
Purchase of short-term investments (7,427) (41,837)
Proceeds from sale of short-term investments 10,879 45,993
Proceeds from sale of investments 500 --
------- --------
Net cash provided by (used for) investing activities (2,002) 277
------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 872 235
Payment of long-term obligation (226) (325)
------- --------
Net cash provided by (used for) financing activities 646 (90)
------- --------
Net decrease in cash and cash equivalents (4,002) (5,637)
BEGINNING CASH AND CASH EQUIVALENTS 43,143 62,640
------- --------
ENDING CASH AND CASH EQUIVALENTS $39,141 $ 57,003
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 14 $ 59
======= ========
Income taxes paid $ 9 $ 8
======= ========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock purchase warrants forfeited $ 1,175 $ --
======= ========
Restricted stock forfeited $ -- $ 9
======= ========
Property and equipment purchases included in accounts payable $ 66 $ 291
======= ========
Accretion of redeemable preferred stock $ 144 $ 143
======= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 5, 2006
(Unaudited)
(1) GENERAL
ValueVision Media, Inc. and its subsidiaries (the "Company") is an
integrated direct marketing company that markets, sells and distributes its
products directly to consumers through various forms of electronic media and
direct-to-consumer mailings. The Company's operating strategy as a multi-channel
retailer incorporates television home shopping, Internet e-commerce, direct mail
marketing and fulfillment services.
The Company's television home shopping business uses on-air spokespersons
to market brand name merchandise and proprietary / private label consumer
products at competitive prices. The Company's live 24-hour per day television
home shopping programming is distributed primarily through long-term cable and
satellite affiliation agreements and the purchase of month-to-month full and
part-time lease agreements of cable and broadcast television time. In addition,
the Company distributes its programming through one Company-owned full power
television station in Boston, Massachusetts. The Company also complements its
television home shopping business by the sale of a broad array of merchandise
through its Internet shopping website, www.shopnbc.com.
The Company has an exclusive license agreement with NBC Universal, Inc.
("NBC"), pursuant to which NBC granted the Company worldwide use of an
NBC-branded name and the Peacock image for a ten-year period. The Company
rebranded its television home shopping network and companion Internet shopping
website as "ShopNBC" and "ShopNBC.com", respectively, in fiscal 2001. This
rebranding was intended to position the Company as a multimedia retailer,
offering consumers an entertaining, informative and interactive shopping
experience, and position the Company as a leader in the evolving convergence of
television and the Internet.
The Company, through its wholly owned subsidiary, VVI Fulfillment Center,
Inc. ("VVIFC"), provides fulfillment, warehousing, customer service and
telemarketing services to Ralph Lauren Media, LLC ("RLM"), the operator of the
Polo.com e-commerce business in which the Company holds a minority equity
interest. VVIFC also provides fulfillment and warehousing services for the
fulfillment of merchandise sold on the Company's television home shopping
program and Internet website.
(2) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America have been
condensed or omitted in accordance with such rules and regulations. The
information furnished in the interim condensed consolidated financial statements
includes normal recurring accruals and reflects all adjustments which, in the
opinion of management, are necessary for a fair presentation of such financial
statements. Although management believes the disclosures and information
presented are adequate, it is suggested that these interim condensed
consolidated financial statements be read in conjunction with the Company's most
recent audited financial statements and notes thereto included in its fiscal
2005 Annual Report on Form 10-K. Operating results for the six month period
ended August 5, 2006 are not necessarily indicative of the results that may be
expected for the fiscal year ending February 3, 2007.
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. Intercompany accounts
and transactions have been eliminated in consolidation.
7
FISCAL YEAR
The Company's most recently completed fiscal year ended on February 4, 2006
and is designated "fiscal 2005". The Company's fiscal year ending February 3,
2007 is designated "fiscal 2006". On April 29, 2005, the Company elected to
change its fiscal year from a fiscal year ending January 31 to a 52/53 week
fiscal year ending on the first Saturday in February of each calendar year. This
change was effective beginning with the Company's 2005 fiscal year. The Company
made this change in order to align its fiscal year more closely to its retail
seasonal merchandising plan. The change also enhanced the weekly and monthly
comparability of sales results relating to the Company's television
home-shopping business. As a result of the fiscal year change, the fourth
quarter of fiscal 2006 will have thirteen weeks as compared to the fourth
quarter of fiscal 2005 which had fourteen weeks. The change did not have a
significant impact on the Company's fiscal 2005 annual consolidated financial
statements.
(3) STOCK-OPTION COMPENSATION
Effective February 5, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123(R) (revised 2004), "Share-Based Payment", which
revised SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). This
standard requires compensation costs related to share-based payment transactions
to be recognized in the financial statements. The Company adopted the standard
using the modified prospective transition method, which requires the application
of the accounting standard to all share-based awards issued on or after the date
of adoption and any outstanding share-based awards that were issued but not
vested as of the date of adoption. Accordingly, the Company did not restate the
financial statements for periods prior to the first quarter of fiscal 2006 as a
result of the adoption.
Stock-based compensation expense from continuing operations in the second
quarter of fiscal 2006 and the second quarter of fiscal 2005 related to stock
option awards was $346,000 and $-0-, respectively. Stock-based compensation
expense from continuing operations in the first half of fiscal 2006 and first
half of fiscal 2005 related to stock option awards was $746,000 and $-0-,
respectively. The adoption of SFAS No. 123(R) in fiscal 2006 resulted in the
recognition of incremental pre-tax stock based compensation expense and an
increase in the year to date net loss of $746,000 and a $.01 negative impact on
basic and fully diluted loss per share. The Company has not recorded any income
tax benefit from the exercise of stock options due to the uncertainty of
realizing income tax benefits in the future. Additionally, the Company
reclassified unearned compensation on restricted stock awards of $154,000 to
additional paid in capital. The cumulative effect adjustment for forfeitures
related to non-vested stock-based awards was not material.
At August 5, 2006, the Company had two active omnibus stock plans for which
stock awards can be currently granted: the 2004 Omnibus Stock Plan (as amended
and restated in fiscal 2006) which provides for the issuance of up to 4,000,000
shares of the Company's common stock; and the 2001 Omnibus Stock Plan which
provides for the issuance of up to 3,000,000 shares of the Company's stock.
These plans are administered by the Company's Human Resources and Compensation
Committee ("Compensation Committee") and provide for awards for employees,
directors and consultants. All employees of the Company or its affiliates are
eligible to receive awards under the plans. The types of awards that may be
granted under these plans include restricted (unvested shares) and unrestricted
stock, incentive and nonstatutory stock options, stock appreciation rights,
performance units, and other stock-based awards. Incentive stock options may be
granted to employees at such exercise prices as the Compensation Committee may
determine but not less than 100% of the fair market value of the underlying
stock as of the date of grant. No incentive stock option may be granted more
than ten years after the effective date of the respective plan's inception or be
exercisable more than ten years after the date of grant. Options granted to
outside directors are nonstatutory stock options with an exercise price equal to
100% of the fair market value of the underlying stock as of the date of grant.
Options granted under these plans are exercisable and generally vest over three
years and generally have contractual terms of either five years from the date of
vesting or ten years from the date of grant. Previous to the adoption of the
2004 and 2001 plans, the Company had other incentive stock option plans in place
in which stock options were granted to employees under similar vesting terms.
The Company no longer makes any further grants from these other plans. The
Company has also granted non-qualified stock options to current and former
directors and certain employees with similar vesting terms.
The fair value of each option award is estimated on the date of grant using
the Black-Scholes option pricing model that uses assumptions noted in the
following table. Expected volatilities are based on the historical volatility of
the Company's stock. Expected term is calculated using the simplified method
taking into consideration the option's contractual life and vesting terms. The
risk-free interest rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of grant. Expected
dividend yields were not used in the fair value computations as the Company has
never declared or paid dividends on its common stock and currently intends to
retain earnings for use in operations.
8
FISCAL FISCAL
2006 2005
--------- -------
Expected volatility........ 33%-35% 36%
Expected term (in years)... 6 years 6 years
Risk-free interest rate.... 4.7%-5.12% 4.7%
A summary of the status of the Company's stock option activity as of August
5, 2006 and changes during the quarter then ended is as follows:
2004 2001 1990 1994
INCENTIVE WEIGHTED INCENTIVE WEIGHTED INCENTIVE WEIGHTED OTHER NON- WEIGHTED EXECUTIVE WEIGHTED
STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE QUALIFIED AVERAGE STOCK AVERAGE
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE STOCK EXERCISE OPTION EXERCISE
PLAN PRICE PLAN PRICE PLAN PRICE OPTIONS PRICE PLAN PRICE
--------- -------- --------- -------- --------- -------- ---------- -------- --------- --------
Balance outstanding,
February 4, 2006....... 1,776,000 $12.03 2,124,000 $14.78 900,000 $18.16 2,551,000 $16.50 648,000 $16.68
Granted................ 40,000 11.93 -- -- -- -- -- -- -- --
Exercised.............. (4,000) 11.07 (28,000) 12.35 (31,000) 10.66 (40,000) 10.69 (100,000) 3.38
Forfeited or canceled.. (78,000) 12.70 (164,000) 15.47 (53,000) 20.76 (399,000) 18.94 -- --
--------- ------ --------- ------ ------- ------ --------- ------ -------- -----
Balance outstanding,
August 5, 2006......... 1,734,000 $12.00 1,932,000 $14.76 816,000 $18.28 2,112,000 $16.15 548,000 $19.11
========= ====== ========= ====== ======= ====== ========= ====== ======== ======
Options exercisable at:
August 5, 2006........ 1,327,000 $12.30 1,915,000 $14.79 816,000 $18.28 2,061,000 $16.27 548,000 $19.11
========= ====== ========= ====== ======= ====== ========= ====== ======== ======
The following table summarizes information regarding stock options
outstanding at August 5, 2006:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING WEIGHTED REMAINING
AVERAGE CONTRACTUAL AGGREGATE AVERAGE CONTRACTUAL AGGREGATE
OPTIONS EXERCISE LIFE INTRINSIC OPTIONS EXERCISE LIFE INTRINSIC
OPTION TYPE OUTSTANDING PRICE (YEARS) VALUE EXERCISABLE PRICE (YEARS) VALUE
- ----------- ----------- -------- ----------- ---------- ----------- -------- ----------- ----------
2004 Incentive:........ 1,734,000 $12.00 8.3 $ 106,000 1,327,000 $12.30 8.2 $ 66,000
========= ========== ========= ==========
2001 Incentive:........ 1,932,000 $14.76 5.2 $ 6,000 1,915,000 $14.79 5.2 $ 6,000
========= ========== ========= ==========
1990 Incentive:........ 816,000 $18.28 1.7 $ 16,000 816,000 $18.28 1.7 $ 16,000
========= ========== ========= ==========
Other Non-qualified:... 2,112,000 $16.15 5.1 $ -- 2,061,000 $16.27 5.0 $ --
========= ========== ========= ==========
1994 Executive:........ 548,000 $19.11 2.7 $1,408,000 548,000 $19.11 2.7 $1,408,000
========= ========== ========= ==========
The weighted average grant date fair value of options granted in the first
half of fiscal 2006 and 2005 was $5.15 and $6.81, respectively. The total
intrinsic value of options exercised during the first half of fiscal 2006 and
2005 was $1,111,000 and $27,000, respectively. As of August 5, 2006, total
unrecognized compensation cost related to stock options was $1,988,000 and is
expected to be recognized over a weighted average period of approximately 0.9
years.
Prior to fiscal 2006, the Company accounted for its stock option plans
under the recognition and measurement principles of APB No. 25, and the
disclosure-only provisions of SFAS 123. No employee stock option compensation
cost was reflected in the net loss, as all options granted under those plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net loss and
net loss per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
THREE MONTHS SIX MONTHS
ENDED ENDED
JULY 30, JULY 30,
2005 2005
------------ ------------
Net loss available to common
shareholders:
As reported ......................... $(1,490,000) $(12,258,000)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects .. (1,824,000) (6,858,000)
----------- ------------
Pro forma ........................... $(3,314,000) $(19,116,000)
=========== ============
Net loss per share:
Basic:
As reported ...................... $ (0.04) $ (0.33)
Pro forma ........................ (0.09) (0.52)
Diluted:
As reported ...................... $ (0.04) $ (0.33)
Pro forma ........................ (0.09) (0.52)
9
In December 2005, the Company's board of directors approved the
acceleration and vesting of approximately 1,200,000 outstanding unvested stock
options with an exercise price greater than $11.78 per share as of December 19,
2005 under the Company's stock-based incentive compensation plans. The options
affected are held by executive officers, directors and employees of the Company
and had a range of exercise prices between $11.80 and $19.26 per share and a
weighted average exercise price of $15.06 per share. The board accelerated the
vesting period to eliminate the Company's future recognition of compensation
expense associated with these out-of-the money stock options required under SFAS
No. 123(R), which became effective for the Company beginning in the first
quarter of fiscal 2006.
(4) NET LOSS PER COMMON SHARE
The Company calculates earnings per share ("EPS") in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). Basic EPS is computed by dividing reported earnings by
the weighted average number of common shares outstanding for the reported
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock of the Company during reported periods.
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
------------------------- --------------------------
AUGUST 5, JULY 30, AUGUST 5, JULY 30,
2006 2005 2006 2005
----------- ----------- ----------- ------------
Net loss available to common
shareholders .................. $ (768,000) $(1,490,000) $(2,931,000) $(12,258,000)
=========== =========== =========== ============
Weighted average number of common
shares outstanding - Basic .... 37,736,000 37,102,000 37,708,000 37,090,000
Dilutive effect of convertible
preferred stock ............... -- -- -- --
Dilutive effect of stock options
and warrants .................. -- -- -- --
----------- ----------- ----------- ------------
Weighted average number of common
shares outstanding - Diluted .. 37,736,000 37,102,000 37,708,000 37,090,000
=========== =========== =========== ============
Net loss per common share ........ $ (0.02) $ (0.04) $ (0.08) $ (0.33)
=========== =========== =========== ============
Net loss per common share-
assuming dilution ............. $ (0.02) $ (0.04) $ (0.08) $ (0.33)
=========== =========== =========== ============
In accordance with SFAS No. 128, for the three month periods ended August
5, 2006 and July 30, 2005, approximately 224,000 and 514,000, respectively,
in-the-money potentially dilutive common share stock options and warrants and
5,340,000 shares of convertible preferred stock have been excluded from the
computation of diluted earnings per share, as the effect of their inclusion
would be antidilutive. For the six month periods ended August 5, 2006 and July
30, 2005, approximately 249,000 and 687,000, respectively, in-the-money
potentially dilutive common share stock options and warrants and 5,340,000
shares of convertible preferred stock have been excluded from the computation of
diluted earnings per share, as the effect of their inclusion would be
antidilutive.
(5) COMPREHENSIVE LOSS
The Company reports comprehensive loss in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting in the financial
statements all changes in equity during a period, except those resulting from
investments by and distributions to owners. For the Company, comprehensive loss
includes net loss and other comprehensive income (loss). Total comprehensive
loss was $696,000 and $1,419,000 for the three month periods ended August 5,
2006 and July 30, 2005, respectively. Total comprehensive loss was $2,787,000
and $12,115,000 for the six month periods ended August 5, 2006 and July 30,
2005, respectively. The Company no longer has any long-term equity investments
classified as "available-for-sale."
10
(6) SEGMENT DISCLOSURES
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires
the disclosure of certain information about operating segments in financial
statements. The Company's reportable segments are based on the Company's method
of internal reporting. The Company's primary business segment is its electronic
media segment, which consists of the Company's television home shopping business
and Internet shopping website business. Management has reviewed the provisions
of SFAS No. 131 and has determined that the Company's television and Internet
home shopping businesses meet the aggregation criteria as outlined in SFAS No.
131 since these two businesses have similar customers, products, economic
characteristics and sales processes. Products sold through the Company's
electronic media segment primarily include jewelry, computers and other
electronics, housewares, apparel, health and beauty aids, fitness products,
giftware, collectibles, seasonal items and other merchandise. The Company's
segments currently operate in the United States and no one customer represents
more than 5% of the Company's overall revenue. There are no material
intersegment product sales. Segment information as of and for the three and six
month periods ended August 5, 2006 and July 30, 2005 are as follows:
SHOPNBC & FULFILLMENT EQUITY CONTINUING FANBUZZ, INC.
THREE MONTH PERIODS ENDED (IN THOUSANDS) SHOPNBC.COM SERVICES (A) INVESTMENTS (B) OPERATIONS (DISCONTINUED) TOTAL
- ---------------------------------------- ----------- ------------ --------------- ---------- -------------- --------
AUGUST 5, 2006
Revenues ............................... $184,432 $2,550 $ -- $186,982 $ -- $
Operating (loss) income ................ (2,824) 128 -- (2,696) --
Depreciation and amortization .......... 5,203 171 -- 5,374 --
Interest income ........................ 1,015 -- -- 1,015 --
Income taxes ........................... 15 -- -- 15 --
Net income (loss) ...................... (1,750) 54 1,000 (696) -- (696)
Identifiable assets .................... 335,710 6,024 2,929 344,663 -- 344,663
-------- ------ ------ -------- ------ --------
JULY 30, 2005
Revenues ............................... $167,013 $2,479 $ -- $169,492 $2,176 $
Operating (loss) income ................ (2,563) 310 -- (2,253) (488)
Depreciation and amortization .......... 4,798 228 -- 5,026 76
Interest income (expense) .............. 743 -- -- 743 (5)
Income tax provision (benefit) ......... (826) -- -- (826) --
Net income (loss) ...................... (989) 63 -- (926) (493) (1,419)
Identifiable assets, February 4, 2006 .. 338,939 6,461 1,383 346,783 356 347,139
-------- ------ ------ -------- ------ --------
SHOPNBC & FULFILLMENT EQUITY CONTINUING FANBUZZ, INC.
SIX MONTH PERIODS ENDED (IN THOUSANDS) SHOPNBC.COM SERVICES (A) INVESTMENTS (B) OPERATIONS (DISCONTINUED) TOTAL
- -------------------------------------- ----------- ------------ --------------- ---------- -------------- --------
AUGUST 5, 2006
Revenues ............................... $360,770 $4,936 $ -- $365,706 $ -- $
Operating (loss) income ................ (6,995) 381 -- (6,614) --
Depreciation and amortization .......... 10,400 350 -- 10,750 --
Interest income ........................ 1,961 -- -- 1,961 --
Income taxes ........................... 30 -- -- 30 --
Net income (loss) ...................... (4,566) 233 1,546 (2,787) -- (2,787)
Identifiable assets .................... 335,710 6,024 2,929 344,663 -- 344,663
-------- ------ ------ -------- ------- --------
JULY 30, 2005
Revenues ............................... $318,705 $4,263 $ -- $322,968 $ 4,863 $
Operating (loss) income ................ (12,644) 366 -- (12,278) (2,054)
Depreciation and amortization .......... 9,673 458 -- 10,131 261
Interest income (expense) .............. 1,406 -- -- 1,406 (22)
Income tax provision (benefit) ......... (820) -- -- (820) --
Net loss ............................... (9,909) (130) -- (10,039) (2,076) (12,115)
Identifiable assets, February 4, 2006 .. 338,939 6,461 1,383 346,783 356 347,139
-------- ------ ------ -------- ------- --------
11
(A) Revenue from segments below quantitative thresholds are attributable to
VVIFC, which provides fulfillment, warehousing and telemarketing services
primarily to RLM and the Company.
(B) Equity investment assets and net income from equity investments consist of
long-term investments and earnings from equity investments accounted for
under the equity method of accounting and are not directly assignable to a
business unit.
Information on net sales from continuing operations by significant product
groups are as follows (in thousands):
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
------------------------- -----------------------
AUGUST 5, JULY 30, AUGUST 5, JULY 30,
2006 2005 2006 2005
--------- -------- --------- --------
Jewelry ......................... $100,854 $ 90,056 $198,364 $166,882
Electronics ..................... 41,006 36,725 73,568 66,631
Home ............................ 19,240 19,754 39,363 36,686
All others, less than 10% each .. 25,882 22,957 54,411 52,769
-------- -------- -------- --------
Total ........................ $186,982 $169,492 $365,706 $322,968
======== ======== ======== ========
(7) RELATED PARTY TRANSACTIONS
In conjunction with its services agreement with RLM, the Company records
revenue for amounts billed to RLM for customer service and fulfillment services.
Revenues recorded from these services were $2,550,000 and $2,479,000 for the
quarters ended August 5, 2006 and July 30, 2005, respectively and were
$4,936,000 and $4,263,000 for the six month periods ended August 5, 2006 and
July 30, 2005, respectively. Amounts due from RLM were $911,000 and $757,000, as
of August 5, 2006 and July 30, 2005, respectively. In November 2005, RLM
notified the Company that it had elected to extend the term of its existing
services agreement with the Company to May 31, 2007.
The Company entered into an agreement with RightNow Technologies, Inc.
("RightNow") in 2005 under which the Company purchased software applications
which enable the Company to utilize certain customer services technologies
developed by RightNow. The Company's President and Chief Executive Officer,
William J. Lansing, serves on the board of directors of RightNow. The Company
made payments totaling approximately $146,000 during fiscal 2006 (as of August
5, 2006) and $48,000 during fiscal 2005, respectively, for this technology and
annual software maintenance fees relating to this technology and other services.
(8) RESTRICTED STOCK
On June 21, 2006, the Company granted a total of 40,000 shares of
restricted stock from the Company's 2004 Omnibus Stock Plan to its five
non-management directors elected by the holders of the Company's common stock
(in contrast to the three directors elected by the holders of the Company's
preferred stock) as part of the Company's annual director compensation program.
The restricted stock vests on the first anniversary of the date of grant. The
aggregate market value of the restricted stock at the date of award was $468,000
and is being amortized as director compensation expense over a twelve month
period. In the second quarter of fiscal 2004, the Company awarded 25,000 shares
of restricted stock to certain employees. This restricted stock grant vests over
different periods ranging from 17 to 53 months. The aggregate market value of
the restricted stock at the award dates was $308,000 and is being amortized as
compensation expense over the respective vesting periods. Compensation expense
recorded in the first half of fiscal 2006 and the first half of fiscal 2005
relating to restricted stock grants was $78,000 and $98,000, respectively. As of
August 5, 2006, there was $543,000 of total unrecognized compensation cost
related to non-vested restricted stock granted. That cost is expected to be
recognized over a weighted average period of 1.2 years. The total fair value of
restricted stock vested during the first half of fiscal 2006 and 2005 was
$26,000 and $464,000, respectively.
12
A summary of the status of the Company's non-vested restricted stock
activity as of August 5, 2006 and changes during the six month period then ended
is as follows:
WEIGHTED
AVERAGE
GRANT DATE
SHARES FAIR VALUE
------ ----------
Non-vested outstanding,
February 4, 2006 ...... 23,000 $12.28
Granted ............... 40,000 11.69
Vested ................ (3,000) 12.75
Forfeited ............. -- --
------ ------
Non-vested outstanding,
August 5, 2006 ........ 60,000 $11.87
====== ======
(9) COMMON STOCK REPURCHASE PROGRAM
In August, 2006, the Company's board of directors authorized a common stock
repurchase program. The program authorizes the Company's management, acting
through an investment banking firm selected as the Company's agent, to
repurchase up to $10 million of the Company's common stock through August 2007
by open market purchases or negotiated transactions at prices and amounts as
determined by the Company from time to time. The Company did not repurchase any
shares under any stock repurchase programs during the three and six month
periods ended August 5, 2006 or July 30, 2005.
(10) GOODWILL AND OTHER INTANGIBLE ASSETS
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), addresses the financial accounting and
reporting standards for the acquisition of intangible assets outside of a
business combination and for goodwill and other intangible assets subsequent to
their acquisition. The accounting standard requires that goodwill be separately
disclosed from other intangible assets in the statement of financial position,
and no longer be amortized but tested for impairment annually or whenever an
event has occurred that would more likely than not reduce the fair value of the
asset below its carrying amount.
Intangible assets have been recorded by the Company as a result of the
acquisition of FanBuzz in fiscal 2002 and television station WWDP TV-46 in
fiscal 2003. The components of amortized and unamortized intangible assets in
the accompanying condensed consolidated balance sheets consist of the following:
AUGUST 5, 2006 FEBRUARY 4, 2006
-------------------------- --------------------------
AVERAGE GROSS GROSS
LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------- ----------- ------------ ----------- ------------
Amortized intangible assets:
Website address ............. 3 $ 1,000,000 $(1,000,000)
Partnership contracts ....... 2 280,000 (280,000)
Non-compete agreements ...... 3 230,000 (230,000)
Favorable lease contracts ... 13 200,000 (200,000)
Other ....................... 2 290,000 (290,000)
----------- -----------
Total .................... $ 2,000,000 $(2,000,000)
=========== ===========
Unamortized intangible assets:
FCC broadcast license ....... $31,943,000 $31,943,000
=========== ===========
Amortization expense for intangible assets for the six months ended July
30, 2005 was $68,000. As of August 5, 2006, intangible assets relating to
FanBuzz had a remaining carrying value of $-0-. The results of operations for
FanBuzz are classified as discontinued operations in the accompanying condensed
consolidated statements of operations. See Note 13 for a discussion of the
discontinued operations of FanBuzz.
The FCC broadcasting license, which relates to the Company's acquisition of
television station WWDP TV-46, is not subject to amortization as a result of its
indefinite useful life. The Company tests the FCC license asset for impairment
annually, or more frequently if events or changes in circumstances indicate that
the asset might be impaired.
13
(11) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48")
Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement
No. 109. FIN 48 prescribes a comprehensive model for recognizing, measuring,
presenting and disclosing in the financial statements tax positions taken or
expected to be taken on a tax return, including a decision whether to file or
not to file a tax return in a particular jurisdiction. FIN 48 is effective for
fiscal years beginning after December 15, 2006. If there are changes in net
assets as a result of the application of FIN48, these will be accounted for as
an adjustment to retained earnings. The Company does not expect the impact of
FIN 48 to have a material effect on its consolidated results of operations or
financial position.
In May 2005, the FASB, as part of an effort to conform to international
accounting standards, issued SFAS No. 154, "Accounting Changes and Error
Corrections ("SFAS No. 154"). SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. SFAS No. 154 requires that all voluntary changes in accounting principles
be retrospectively applied to prior financial statements as if that principle
had always been used, unless it is impracticable to do so. When it is
impracticable to calculate the effects on all prior periods, SFAS No. 154
requires that the new principle be applied to the earliest period practicable.
SFAS No. 154 also redefines "restatement" as the revising of previously issued
financial statements to reflect the correction of an error. The adoption of SFAS
No. 154 did not have a material effect on the Company's financial position or
results of operations.
(12) ASSET IMPAIRMENT AND EMPLOYEE TERMINATION COSTS
During the quarter ended April 30, 2005, a number of FanBuzz customers
notified the Company that they had elected not to renew the term of their
e-commerce services agreements with FanBuzz or had decided to terminate their
agreements as permitted in the agreement. Following these notifications, the
Company assessed whether there had been an impairment of the FanBuzz long-lived
assets in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). The Company performed a cash flow analysis and concluded that the book
value of certain long-lived assets at FanBuzz was significantly higher than
their probability-weighted expected future cash flows and that an impairment had
occurred. Accordingly, the Company recorded a non-cash impairment loss and
related charge of $400,000 in the first quarter of fiscal 2005. The impairment
charge is included in loss from discontinued operations in the accompanying
consolidated statement of operations for the six month period ended July 30,
2005.
During the quarter ended April 30, 2005, the Company also recorded an
additional $528,000 charge to earnings and established a related accrual
primarily in connection with the downsizing of the FanBuzz operations. The
charge consisted primarily of severance pay and related benefit costs associated
with the elimination of approximately twelve positions. The severance was paid
out over periods ranging from one to twelve months. Of this charge, $446,000 is
included in loss from discontinued operations in the accompanying consolidated
statement of operations for the six month period ended July 30, 2005.
(13) DISCONTINUED FANBUZZ OPERATIONS
In the second quarter of fiscal 2005, the Company decided to close its
FanBuzz subsidiary operations. The shut down was completed in the third quarter
of fiscal 2005. FanBuzz was an e-commerce and fulfillment solutions provider for
a number of sports, media, entertainment and retail companies. The decision to
shut down FanBuzz was made after continued operating losses were experienced
following the loss of its NHL contract in September 2004 and after a number of
other FanBuzz customers notified the Company in the first quarter of fiscal 2005
that they elected not to renew the term of their e-commerce services agreements.
FanBuzz ceased business operations as of October 29, 2005 and was a reportable
segment under SFAS No. 131. The results of operations for FanBuzz have been
classified as discontinued operations in the accompanying condensed consolidated
statements of operations for all applicable periods presented. Net sales from
discontinued operations were $2,176,000 and $4,863,000, respectively, for the
three and six month periods ended July 30, 2005. Losses from discontinued
operations were $493,000 and $2,076,000, respectively, for the three and six
month periods ended July 30, 2005. The Company's consolidated balance sheet as
of August 5, 2006 includes $100,000 in current assets, $158,000 in current
liabilities and $-0- in long-term assets and long-term liabilities related to
FanBuzz. The Company's consolidated balance sheet as of February 4, 2006
included $356,000 in current assets, $276,000 in current liabilities and $-0- in
long-term assets and long-term liabilities related to FanBuzz.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's accompanying
unaudited condensed consolidated financial statements and notes included herein
and the audited consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended February 4, 2006.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Information contained in this Form 10-Q and in other materials filed by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contain certain "forward-looking statements" within the meaning of
federal securities laws that represent management's expectations or beliefs
concerning future events. These statements are based on management's current
expectations and are accordingly subject to uncertainty and changes in
circumstances. Actual results may vary materially from the expectations
contained herein due to various important factors, including (but not limited
to): consumer spending and debt levels; interest rates; seasonal variations in
consumer purchasing activities; changes in the mix of products sold by the
Company; competitive pressures on sales; pricing and gross profit margins; the
level of cable and satellite distribution for the Company's programming and the
associated fees; the success of the Company's e-commerce initiatives; the
success of the Company's strategic alliances and relationships; the ability of
the Company to manage its operating expenses successfully; risks associated with
acquisitions; changes in governmental or regulatory requirements; litigation or
governmental proceedings affecting the Company's operations; the risks
identified under "Business Risk Factors" in the Company's Form 10-K for the
fiscal year ended February 4, 2006; significant public events that are difficult
to predict, such as widespread weather catastrophes or other significant
television-covering events causing an interruption of television coverage or
that directly competes with the viewership of the Company's programming; and the
ability of the Company to obtain and retain key executives and employees.
Investors are cautioned that all forward-looking statements involve risk and
uncertainty and the Company is under no obligation (and expressly disclaims any
such obligation) to update or alter its forward-looking statements whether as a
result of new information, future events or otherwise.
In addition to any specific risks and uncertainties discussed in this Form
10-Q, the risks and uncertainties discussed in detail in the Company's Form 10-K
for the fiscal year ended February 4, 2006, specifically under the captions
entitled "Risk Factors" and "Critical Accounting Policies and Estimates,"
provide information that should be considered in evaluating any of the Company's
forward-looking statements. In addition, the facts and circumstances that exist
when any forward-looking statements are made and on which those forward-looking
statements are based may significantly change in the future, thereby rendering
obsolete the forward-looking statements on which such facts and circumstances
were based. The Company is under no obligation (and expressly disclaims any such
obligation) to update or alter its forward-looking statements whether as a
result of new information, future events or otherwise.
OVERVIEW
Company Description
ValueVision Media, Inc. is an integrated direct marketing company that
markets its products directly to consumers through various forms of electronic
media and direct-to-consumer mailings. The Company's operating strategy as a
multi-channel retailer incorporates television home shopping, Internet
e-commerce, direct mail marketing and fulfillment services. The Company's live
24-hour per day television home shopping programming is distributed primarily
through long-term cable and satellite affiliation agreements.
Products and Customers
Products sold on the Company's television home shopping network and
Internet shopping website include jewelry, computers and other electronics,
housewares, apparel, cosmetics, fitness products, giftware, collectibles,
seasonal items and other merchandise. Jewelry represents the Company's largest
single category of merchandise, representing 58% of television home shopping and
Internet net sales for the three and six month periods ended August 5, 2006 and
57% and 56% of television and Internet net sales for the three and six month
periods ended July 30, 2005. Home products, including electronics product
categories, represented approximately 34% of television home shopping and
Internet net sales for the three and six month periods ended August 5, 2006 and
approximately 35% of television home shopping and Internet net sales for the
three and six month periods ended July 30, 2005. Apparel, health and beauty
product categories represented approximately 8% of television home shopping and
Internet net sales for the three and six
15
month periods ended August 5, 2006 and approximately 8% and 9% of television
home shopping and Internet net sales for the three and six month periods ended
July 30, 2005. The Company believes that having a broad diversity of products
appeals to a broader segment of potential customers and is important to growing
the Company's business. The Company's product diversification strategy is to
continue to develop new product offerings primarily in the home, apparel and
accessories, cosmetics, fitness and consumer electronics categories to
supplement the existing jewelry and computer businesses. The Company believes
that its customers are primarily women between the ages of 35 and 55 with annual
household incomes between $50,000 and $75,000 and believes its customers make
purchases based primarily on convenience, unique product offerings, value and
quality of merchandise.
Company Strategy
The Company's strategy is to be a leader in multichannel retailing,
offering consumers an entertaining, informative and interactive shopping
experience. The following business strategies are intended to continue the
growth and the maximization of gross margin dollars per hour of the Company's
television home shopping business and complementary website: (i) offer a
diversity of merchandise categories that maximize gross margin dollars per hour;
(ii) increase program distribution in the United States through new or expanded
broadcast agreements with cable and satellite operators and other creative means
for reaching consumers, such as webcasting on ShopNBC.com; (iii) increase
average net sales per home by increasing penetration within existing homes
receiving the Company's programming and by attracting new customers through a
broader merchandise mix and targeted marketing efforts; (iv) continue to grow
the Company's Internet business through the innovative use of marketing and
technology, such as advanced search strategies, personalization, Internet video
presentation and auction capabilities; (v) upgrade the overall quality of the
Company's network, programming and customer support infrastructure consistent
with expectations associated with the NBC brand name; (vi) increase the average
order size through various sales initiatives including add-on sales, continuity
programs and warranty sales; and (vii) leverage the strong brand recognition of
the NBC name and associated peacock symbol to achieve greater brand recognition
with the ShopNBC television channel and ShopNBC.com website.
Challenge
The Company's television home shopping business operates with a high fixed
cost base, which is primarily due to fixed contractual fees paid to cable and
satellite operators to carry the Company's programming. In addition, the Company
has invested in new initiatives intended to sustain sales growth that has
required significant up-front investment. These new initiatives include
increased marketing support, improved customer experience, enhanced on-air
quality and improved business intelligence. In order to attain profitability,
the Company must achieve sufficient sales volume through the acquisition of new
customers and the increased retention of existing customers to cover its high
fixed costs and the cost of these new initiatives. The Company's growth and
profitability could be adversely impacted if sales volume does not meet
expectations, as the Company will have limited immediate capability to reduce
its fixed cable and satellite distribution operating expenses to mitigate any
potential sales shortfall.
Competition
The direct marketing and retail businesses are highly competitive. In its
television home shopping and e-commerce operations, the Company competes for
customers with other types of consumer retail businesses, including traditional
"brick and mortar" department stores, discount stores, warehouse stores and
specialty stores; other television home shopping and e-commerce retailers;
infomercial companies; catalog and mail order retailers and other direct
sellers.
In the competitive television home shopping sector, the Company competes with
QVC Network, Inc. and HSN, Inc., both of whom are substantially larger than the
Company in terms of annual revenues and customers, and whose programming is
carried more broadly to U.S. households than is the Company's programming. Both
QVC and HSN are owned by large, well-capitalized parent companies in the media
business, who are also expanding into related e-commerce and web-based
businesses. The American Collectibles Network ("ACN"), the operator of Jewelry
Television, also competes with the Company for television home shopping
customers in the jewelry category, and ACN has recently acquired the assets of
Shop At Home from E. W. Scripps Company and is operating a second channel of
programming in a number of non-jewelry categories, including collectible coins
and knives. In addition, there are a number of smaller niche players and
startups in the television home shopping arena who compete with the Company.
The e-commerce sector is also highly competitive, and the Company is in direct
competition with numerous other Internet retailers, many of whom are larger,
more well-financed and/or have a broader customer base. Certain of the Company's
competitors in the television home shopping sector have acquired Internet
businesses complementary to their existing Internet sites, which may pose new
competitive challenges for the Company. For example, the parent company of HSN
has acquired an Internet search business, Ask Jeeves (now known as Ask.com), and
the parent company of QVC acquired Provide Commerce, an operator of retail
websites.
16
The Company anticipates continuing competition for viewers and customers, for
experienced home shopping personnel, for distribution agreements with cable and
satellite systems, and for vendors and suppliers - not only from television home
shopping companies, but also from other companies that seek to enter the home
shopping and Internet retail industries, including telecommunications and cable
companies, television networks, and other established retailers. The Company
believes that its success in the TV home shopping and e-commerce sectors is
dependent on a number of key factors, including (i) obtaining carriage on
additional cable systems on favorable terms, (ii) increasing the number of
households who purchase products from the Company, and (iii) increasing the
dollar value of sales per customer to its existing customer base.
Results for the Second Quarter of Fiscal 2006
Consolidated net sales from continuing operations for the quarter ended
August 5, 2006 were $186,982,000 compared to $169,492,000 for the quarter ended
July 30, 2005, a 10% increase. The increase in consolidated net sales from
continuing operations is directly attributable to the increased net sales from
the Company's television home shopping and Internet operations. Net sales
attributed to the Company's television home shopping and Internet operations
increased to $184,432,000 for the quarter ended August 5, 2006 from $167,013,000
for the quarter ended July 30, 2005. Consolidated gross margins from continuing
operations were 34.9% for the quarter ended August 5, 2006 compared to 35.2% for
the quarter ended July 30, 2005. The Company reported an operating loss of
$2,696,000 from continuing operations and a net loss of $696,000 for the second
quarter of fiscal 2006. The Company reported an operating loss of $2,253,000
from continuing operations and a net loss of $1,419,000, which included a net
loss of $493,000 from discontinued operations, for the second quarter of fiscal
2005. Effective in the third quarter of fiscal 2005, the results of operations
of FanBuzz have been presented as loss from discontinued operations in the
accompanying consolidated statements of operations for all applicable periods
presented.
DISCONTINUED FANBUZZ OPERATIONS
In the second quarter of fiscal 2005, the Company decided to wind down its
FanBuzz subsidiary operations and finalized the shut down in the third fiscal
quarter of 2005. FanBuzz, acquired by the Company in fiscal 2002, was an
e-commerce and fulfillment solutions provider for a number of sports, media,
entertainment and retail companies. The decision to shut down FanBuzz was made
after continued operating losses were experienced following the loss of its NHL
contract in September 2004 and after a number of other FanBuzz customers
notified the Company in the first quarter of fiscal 2005 that they had elected
not to renew the term of their e-commerce services agreements. FanBuzz ceased
business operations as of October 29, 2005 and was a reportable segment under
SFAS No. 131. The results of operations for FanBuzz have been classified as
discontinued operations in the accompanying consolidated statements of
operations for all applicable periods presented. See Note 13 to the condensed
consolidated financial statements.
ASSET IMPAIRMENT AND EMPLOYEE TERMINATION COSTS
During the quarter ended April 30, 2005, a number of FanBuzz customers
notified the Company that they had elected not to renew the term of their
e-commerce services agreements with FanBuzz or had decided to terminate their
agreements. Following these notifications, the Company assessed whether there
had been an impairment of the FanBuzz long-lived assets in accordance with SFAS
No. 144. The Company performed a cash flow analysis and concluded that the book
value of certain long-lived assets at FanBuzz was significantly higher than
their probability-weighted expected future cash flows and that an impairment had
occurred. Accordingly, the Company recorded a non-cash impairment loss and
related charge of $400,000 in the first quarter of fiscal 2005. The impairment
charge is included in loss from discontinued operations in the accompanying
consolidated statement of operations for the six month period ended July 30,
2005.
During the quarter ended April 30, 2005, the Company also recorded an
additional $528,000 charge to earnings and established a related accrual
primarily in connection with the downsizing of the FanBuzz operations. The
charge consisted primarily of severance pay and related benefit costs associated
with the elimination of approximately twelve positions. The severance was paid
out over periods ranging from one to twelve months. Of this charge, $446,000 is
included in loss from discontinued operations in the accompanying condensed
consolidated statement of operations for the six month period ended July 30,
2005.
17
RESULTS OF OPERATIONS
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
CONTINUING OPERATIONS
(UNAUDITED)
DOLLAR AMOUNT AS A DOLLAR AMOUNT AS A
PERCENTAGE OF NET PERCENTAGE OF NET
SALES FOR THE SALES FOR THE
THREE MONTH SIX MONTH
PERIODS ENDED PERIODS ENDED
-------------------- --------------------
AUGUST 5, JULY 30, AUGUST 5, JULY 30,
2006 2005 2006 2005
--------- -------- --------- --------
NET SALES 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
GROSS MARGIN 34.9% 35.2% 35.1% 34.4%
----- ----- ----- -----
Operating expenses:
Distribution and selling 29.6% 29.8% 30.2% 31.2%
General and administrative 3.8% 3.7% 3.8% 3.9%
Depreciation and amortization 2.9% 3.0% 2.9% 3.1%
Employee termination costs --% --% --% --%
----- ----- ----- -----
36.3% 36.5% 36.9% 38.2%
----- ----- ----- -----
Operating loss (1.4)% (1.3)% (1.8)% (3.8)%
===== ===== ===== =====
KEY PERFORMANCE METRICS*
(UNAUDITED)
FOR THE THREE MONTH FOR THE SIX MONTH
PERIODS ENDED PERIODS ENDED
-------------------------- --------------------------
AUGUST 5, JULY 30, AUGUST 5, JULY 30,
2006 2005 % 2006 2005 %
--------- -------- --- --------- -------- ---
PROGRAM DISTRIBUTION
Cable FTE's (Average 000's) 39,001 37,990 3% 38,633 37,759 2%
Satellite FTE's (Average 000's) 25,747 23,956 7% 25,529 23,615 8%
-------- -------- --- ------- ------- ---
Total FTEs (Average 000's) 64,748 61,946 5% 64,162 61,374 5%
Net Sales per FTE (Annualized) $ 11.39 $ 10.78 6% $ 11.25 $ 10.39 8%
Active Customers -12 month rolling 817,676 773,210 6% n/a n/a
% New Customers -12 month rolling 55% 58% n/a n/a
% Reactivated & Retained -12 month rolling 45% 42% n/a n/a
Customer Penetration - 12 month rolling 1.3% 1.2% n/a n/a
MERCHANDISE MIX
Jewelry 58% 57% 58% 56%
Apparel, Health & Beauty 8% 8% 8% 9%
Home and All Other 34% 35% 34% 35%
Shipped Units (000's) 1,259 1,159 9% 2,550 2,355 8%
Average Selling Price - Shipped Units $ 207 $ 205 1% $ 200 $ 194 3%
* Includes television home shopping and Internet sales only.
18
PROGRAM DISTRIBUTION
The Company's television home shopping programming was available to
approximately 64.7 million average full time equivalent ("FTE") households for
the three months ended August 5, 2006 and approximately 61.9 million average FTE
households for the three months ended July 30, 2005. Average FTE subscribers
grew 5% in the second quarter ended August 5, 2006, resulting in a 2.8 million
increase in average FTE's versus the prior year comparable quarter. For the six
month period ended August 5, 2006, average FTE's grew 5% to 64.2 million from
61.4 million, an increase of 2.8 million versus the prior year comparable
period. The increases were driven by continued strong growth in satellite
distribution of the Company's programming and increased distribution of the
Company's programming on digital cable.
NET SALES PER FTE
Net sales per FTE for the second quarter ended August 5, 2006 increased 6%,
or $0.61 per FTE, compared to the prior year's comparable quarter. For the six
month period ended August 5, 2006, net sales per FTE increased 8%, or $0.86 per
FTE, versus the prior year's comparable period. The increase in the second
quarter and year-to-date net sales per FTE was primarily the result of strong
second quarter and year-to-date television home shopping and Internet sales
growth over the prior year.
CUSTOMERS
The Company added 44,466 active customers over the twelve-month period
ended August 5, 2006, a 6% increase over active customers added in the prior
year comparable twelve-month period. The increase in active customers resulted
from the increase in household distribution, product diversification efforts and
increases in marketing and promotional efforts aimed at attracting new
customers.
CUSTOMER PENETRATION
Customer penetration measures the total number of customers who purchased
from the Company over the past twelve months divided by the Company's average
FTE's for that same period. This measure was 1.3% for the three month period
ended August 5, 2006 and 1.2% for the three month period ended July 30, 2005.
MERCHANDISE MIX
During the quarter ended August 5, 2006, jewelry net sales increased to 58%
of total television home shopping and Internet net sales from 57% during the
prior year comparable quarter. Net sales from home products, including
electronics categories, decreased to 34% of total television home shopping and
Internet net sales from 35% as compared to the prior year second quarter and net
sales from apparel and health and beauty product categories remained at 8% of
total television home shopping and Internet net sales as compared to the prior
year second quarter. During the six month period ended August 5, 2006 versus the
comparable prior year period, jewelry net sales increased to 58% of total
television home shopping and Internet net sales from 56%. Net sales from home
products, including electronics product categories, decreased from 35% to 34%
during the six month period ended August 5, 2006 versus the comparable prior
year period. Apparel and health and beauty product categories decreased from 9%
to 8% during the same six month comparable period. The Company's merchandise mix
over the past several years has been moving away from its historical reliance on
jewelry and computers to a broader mix that also includes apparel, health and
beauty, fitness, home and other electronic product lines. However, during fiscal
2006, the Company stabilized its overall jewelry mix between 55% and 60%. The
Company's focus on the maximization of gross margin dollars per hour in its
television home shopping and Internet operations will cause the merchandise mix
to shift accordingly.
SHIPPED UNITS
The number of units shipped during the second quarter ended August 5, 2006
increased 9% from the prior year's comparable quarter to 1,259,000 from
1,159,000. For the six month period ended August 5, 2006, shipped units
increased 8% from the prior year comparable period to 2,550,000 from 2,355,000.
The increase in shipped units for the three and six month periods ended August
5, 2006 was due primarily to the increase in net sales over the comparable prior
year periods.
19
AVERAGE SELLING PRICE
The average selling price ("ASP") per unit for the Company was $207 in the
second quarter ended August 5, 2006, a 1% increase from the comparable prior
year quarter. For the six month period ended August 5, 2006, the average per
unit selling price was $200, a 3% increase from the comparable prior year
period. The increase in the ASP during the three and six month periods ended
August 5, 2006 was driven by increases in price points associated primarily with
watches, electronics and apparel merchandise categories.
NET SALES
Consolidated net sales from continuing operations for the three month
period ended August 5, 2006 were $186,982,000 compared with consolidated net
sales of $169,492,000 for the three month period ended July 30, 2005, a 10%
increase. Consolidated net sales from continuing operations for the six month
period ended August 5, 2006 were $365,706,000 compared with consolidated net
sales from continuing operations of $322,968,000 for the six month period ended
July 30, 2005, a 13% increase. The increase in consolidated net sales from
continuing operations is directly attributable to the continued improvement in
net sales from the Company's television home shopping and Internet operations.
Net sales attributed to the Company's television home shopping and Internet
operations increased 10% to $184,432,000 for the quarter ended August 5, 2006
from $167,013,000 for the quarter ended July 30, 2005. Net sales attributed to
the Company's television home shopping and Internet operations increased 13% to
$360,770,000 for the six month period ended August 5, 2006 from $318,705,000 for
the comparable prior year period. The growth in television home shopping and
Internet net sales during the second quarter and the six-month period ended
August 5, 2006 is primarily attributable to increased merchandise sales driven
by the growth in the number of homes receiving the Company's television
programming, higher productivity from existing homes due to increased sales per
hour results achieved in the jewelry, apparel and home merchandise categories
and an increase in Internet net sales of 23% and 26% for the three and six month
periods ended August 5, 2006 over the prior year comparable periods. In
addition, television and Internet net sales increased due to increased shipping
and handling revenue resulting from increased sales in the first six months of
fiscal 2006 compared to fiscal 2005. The Company intends to continue to develop
its merchandising and programming strategies and increase marketing spending
with the goal of improving its television home shopping and Internet sales
results. While the Company is optimistic that television home shopping and
Internet sales results will continue to improve, there can be no assurance that
the Company's sales strategy will achieve the intended results.
GROSS PROFIT
Gross profit from continuing operations for the three months ended August
5, 2006 and July 30, 2005 was $65,227,000 and $59,694,000, respectively, an
increase of $5,533,000. Gross profit from continuing operations for the six
months ended August 5, 2006 and July 30, 2005 was $128,429,000 and $110,992,000,
respectively, an increase of $17,437,000. The increase in gross profit from
continuing operations is directly attributable to increased sales volume from
the Company's television home shopping and Internet businesses. Gross margins
for the three month periods ended August 5, 2006 and July 30, 2005 were 34.9%
and 35.2%, respectively. Gross margins for the six month periods ended August 5,
2006 and July 30, 2005 were 35.1% and 34.4%, respectively. Gross margins for the
quarter ended August 5, 2006 decreased slightly from the comparable prior year
quarter as a result of a decrease in merchandise rates experienced during the
current second quarter as the Company focused on increasing gross margin dollars
per hour rather than overall margin rates. The gross margin improvement for the
six months ended August 5, 2006 over the comparable prior year period was due to
the achievement of higher merchandise margins on television and Internet
merchandise in primarily the jewelry, electronics and apparel product
categories. Gross margins may not be comparable to those of other retailers,
since some retailers include all of the costs related to their product
distribution network in cost of sales while others, including the Company,
exclude a portion of these costs from gross margin, including them instead as a
component of distribution and selling expense.
OPERATING EXPENSES
Total operating expenses from continuing operations for the three months
ended August 5, 2006 were $67,923,000 compared to $61,947,000 for the comparable
prior year period. Total operating expenses from continuing operations for the
six months ended August 5, 2006 were $135,043,000 compared to $123,270,000 for
the comparable prior year period. Total operating expenses from continuing
operations for the six month period ended July 30, 2005 included a charge of
$82,000 recorded in connection with employee terminations. Distribution and
selling expense increased $4,762,000, or 9%, to $55,492,000, or 30% of net sales
from continuing operations, during the second quarter of fiscal 2006 compared to
$50,730,000, or 30% of net sales from continuing operations, for the comparable
prior year period. Distribution and selling expense increased $9,783,000, or
10%, to $110,401,000, or 30% of net sales from continuing operations, for the
six month period ended August 5, 2006 compared to $100,618,000, or 31% of net
sales from continuing operations, for the comparable prior year period.
Distribution and selling expense increased on a year-to-date basis over the
prior year primarily due to an increase in net cable and satellite access fees
of $1,881,000 as a result of a 5% year-to-
20
date increase in the number of average FTE subscribers over the comparable prior
year period; increased costs associated with hiring and retaining primarily
merchandising, television production and show management personnel and on-air
talent of $3,376,000 during fiscal 2006; increased credit card and net
collection fees of $1,535,000 due to the overall increase in net sales;
increased direct-mail and marketing expenses of $1,036,000 as the Company
attempts to acquire additional customers and increase its overall penetration;
increased telemarketing and customer service costs of $1,227,000 associated with
increased sales volumes and the Company's commitment to improve its customer
service; and increased share-based compensation expense of $373,000.
General and administrative expense for the three months ended August 5,
2006 increased $866,000, or 14%, to $7,057,000, or 4% of net sales from
continuing operations, compared to $6,191,000, or 4% of net sales from
continuing operations, for the three months ended July 30, 2005. General and
administrative expense for the six months ended August 5, 2006 increased
$1,424,000, or 11%, to $13,863,000, or 4% of net sales from continuing
operations, compared to $12,439,000, or 4% of net sales from continuing
operations, for the six months ended July 30, 2005. General and administrative
expense increased on a year-to-date basis over the prior year primarily as a
result of compensation recorded related to share-based payments of $373,000,
increased salaries of $592,000, information systems service fees of $280,000 and
accrued bonuses of $179,000, offset by proceeds received from a litigation
settlement totaling $300,000.
Depreciation and amortization expense for the three months ended August 5,
2006 was $5,374,000 compared to $5,026,000 for the three months ended July 30,
2005, representing an increase of $348,000, or 7%, from the comparable prior
year period. Depreciation and amortization expense for the six months ended
August 5, 2006 was $10,750,000 compared to $10,131,000 for the six months ended
July 30, 2005, representing an increase of $619,000, or 6%, from the comparable
prior year period. Depreciation and amortization expense as a percentage of net
sales from continuing operations for the three and six month periods ended
August 5, 2006 and July 30, 2005 was 3% for each period. The increases are
primarily due to increased depreciation and amortization as a result of assets
placed in service in connection with the Company's various application software
development and functionality enhancements.
OPERATING LOSS
For the three months ended August 5, 2006, the Company reported an
operating loss from continuing operations of $2,696,000 compared to an operating
loss from continuing operations of $2,253,000 for the three months ended July
30, 2005. For the six months ended August 5, 2006, the Company reported an
operating loss from continuing operations of $6,614,000 compared to an operating
loss from continuing operations of $12,278,000 for the six months ended July 30,
2005. The Company's operating loss from continuing operations improved for the
six month period ended August 5, 2006 from the comparable prior year period
primarily as a result of the Company's increase in gross profit as described
above under "Gross Profit." Offsetting the increase in gross profit over the
comparable prior year periods, were increases in distribution and selling
expenses, particularly (i) additional personnel costs associated with
merchandising, television production, show management and on-air talent, (ii)
net cable access fees, (iii) direct-mail and marketing expenses, (iv) credit
card fees and bad debt expense, (v) increases in general and administrative
expenses recorded in connection with salaries, accrued bonuses and information
system service fees, and (vi) increases in depreciation and amortization expense
as a result of assets placed in service in connection with the Company's various
application software development and functionality enhancements, the details of
which are discussed above. In addition, operating expenses increased over prior
year due to the recording of noncash stock option expense resulting from the
Company's adoption of SFAS No. 123 (R) in the first quarter of fiscal 2006.
NET LOSS
For the three months ended August 5, 2006, the Company reported a net loss
available to common shareholders of $768,000 or $.02 per share on 37,736,000
weighted average common shares outstanding, compared with a net loss available
to common shareholders of $1,490,000 or $.04 per share on 37,102,000 weighted
average common shares outstanding for the quarter ended July 30, 2005. The net
loss available to common shareholders for the three months ended August 5, 2006
includes the recording of $1,000,000 of equity in earnings from RLM and interest
income totaling $1,015,000 earned on the Company's cash and short-term
investments. For the quarter ended July 30, 2005, the net loss available to
common shareholders included a net loss of $493,000 from discontinued
operations, a $256,000 write-down of a non-operating real estate asset held for
sale, the recording of $14,000 of equity in earnings from RLM, a non cash income
tax benefit of $832,000, and interest income totaling $743,000 earned on the
Company's cash and short-term investments. For the six months ended August 5,
2006, the Company reported a net loss available to common shareholders of
$2,931,000 or $.08 per share on 37,708,000 weighted average common shares
outstanding, compared with a net loss available to common shareholders of
$12,258,000 or $.33 per share on 37,090,000 weighted average common shares
outstanding for the six months ended July 30, 2005. The net loss available to
common shareholders for the six months ended August 5, 2006 includes
21
the recording of $1,546,000 of equity in earnings from RLM, a $500,000 gain on
the sale of an investment, a $150,000 write-down of a non-operating real estate
asset held for sale, and interest income totaling $1,961,000 earned on the
Company's cash and short-term investments. For the six months ended July 30,
2005, the net loss available to common shareholders included a net loss of
$2,076,000 from discontinued operations, a $250,000 cash dividend received from
RLM, a $256,000 write-down of a non-operating real estate asset held for sale,
the recording of $14,000 of equity in earnings from RLM, a $5,000 gain on the
sale of investments, a non cash income tax benefit of $832,000, and interest
income totaling $1,406,000 earned on the Company's cash and short-term
investments.
The Company has not recorded any income tax benefit on the losses recorded
in the quarters ended August 5, 2006 and July 30, 2005 due to the uncertainty of
realizing income tax benefits in the future as indicated by the Company's
recording of an income tax valuation reserve. The Company has recorded a
quarterly income tax provision relating to state income taxes payable on certain
income for which there is no loss carryforward benefit available. The Company
will continue to maintain a valuation reserve against its net deferred tax
assets until the Company believes it is more likely than not that these assets
will be realized in the future. The Company recorded an income tax benefit of
$832,000 in the second quarter of fiscal 2005 related to the reversal of an
income tax contingency reserve that expired in the second quarter of fiscal 2005
and was no longer required.
EBITDA RECONCILIATION
EBITDA, before non-cash stock option expense, for the three month period
ended August 5, 2006 was $4,024,000 compared with EBITDA of $2,531,000 for the
three month period ended July 30, 2005. EBITDA, before non-cash stock option
expense, for the six month period ended August 5, 2006 was $6,778,000 compared
with an EBITDA loss of $2,134,000 for the six month period ended July 30, 2005.
A reconciliation of EBITDA from continuing operations to its comparable GAAP
measurement, net loss, follows in thousands:
For the Three Month Periods Ended For the Six Month Periods Ended
--------------------------------- ----------------------------------
August 5, 2006 July 30, 2005 August 5, 2006 July 30, 2005
-------------- ------------- -------------- -------------
EBITDA, before non-cash stock option expense $ 4,024 $ 2,531 $ 6,778 $ (2,134)
Less: non-cash stock option expense (346) - (746) -
--------------------------------- -----------------------------------
EBITDA (as defined) 3,678 2,531 6,032 (2,134)
A reconciliation of EBITDA to net loss is as follows:
EBITDA, as defined 3,678 2,531 $ 6,032 $ (2,134)
Adjustments:
Depreciation and amortization (5,374) (5,026) (10,750) (10,131)
Interest income 1,015 743 1,961 1,406
Income taxes (15) 826 (30) 820
Discontinued operations of FanBuzz - (493) - (2,076)
---------------------------------- ------------------------------------
Net loss $ (696) $ (1,419) $ (2,787) $ (12,115)
================================== ====================================
EBITDA represents net loss from continuing operations for the respective
periods excluding depreciation and amortization expense, interest income
(expense) and income taxes. Management views EBITDA as an important alternative
operating performance measure because it is commonly used by analysts and
institutional investors in analyzing the financial performance of companies in
the broadcast and television home shopping sectors. However, EBITDA should not
be construed as an alternative to operating loss or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as a measure of liquidity. EBITDA, as
presented, may not be comparable to similarly entitled measures reported by
other companies. Management uses EBITDA to evaluate operating performance and as
a measure of performance for incentive compensation purposes. Management has
included the term EBITDA, before non-cash stock option expense, in its
presentation in order to maintain comparability of previously issued financial
guidance and prior year's reported results.
PROGRAM DISTRIBUTION
The Company's television home shopping programming was available to
approximately 64.7 million average FTE households for the three months ended
August 5, 2006 and approximately 61.9 million average FTE households for the
three months ended July 30, 2005. The Company's television home shopping
programming was available to approximately 64.2 million average FTE households
for the six month period ended August 5, 2006 and approximately 61.4 million
average FTE households for the six month period ended July 30, 2005. The
Company's television home shopping programming is currently available through
affiliation and time-block purchase agreements with approximately 1,300 cable or
satellite systems. The Company also owns and operates a full-power television
station in Boston, Massachusetts. Homes that receive the Company's television
home shopping programming 24 hours per day are counted as one FTE each and homes
that receive the Company's programming for any period less than 24 hours are
counted based upon an analysis of time of day and day of week that programming
is received. The Company's television home shopping programming is also
simulcast live 24 hours a day, 7 days a week through its Internet shopping
website, www.shopnbc.com, which is not included in total FTE households.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISK FACTORS
A discussion of the critical accounting policies related to accounting
estimates and assumptions and specific risks and uncertainties are discussed in
detail in the Company's fiscal 2005 Annual Report on Form 10-K under the
captions entitled "Risk Factors" and "Critical Accounting Policies and
Estimates."
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of August 5, 2006, cash and cash equivalents and short-term investments
were $74,895,000, compared to $82,350,000 as of February 4, 2006, a $7,455,000
decrease. For the six month period ended August 5, 2006, working capital
increased $2,644,000 to $147,853,000. The current ratio was 2.5 at August 5,
2006 compared to 2.4 at February 4, 2006.
SOURCES OF LIQUIDITY
The Company's principal sources of liquidity are its available cash, cash
equivalents and short-term investments, accrued interest earned from its
short-term investments and its operating cash flow, which is primarily generated
from credit card receipts from sales transactions and the collection of
outstanding customer accounts receivables. The timing of customer collections
made pursuant to the Company's ValuePay installment program and the extent to
which the Company extends credit to its customers is important to the Company's
short-term liquidity and cash resources. A significant increase in the Company's
accounts receivable aging or credit losses could negatively impact the Company's
source of cash from operations in the short term. While credit losses have
historically been within the Company's estimates for such losses, there is no
guarantee that the Company will continue to experience the same credit loss rate
that it has experienced in the past. Historically, the Company has also been
able to generate additional cash sources from the proceeds of stock option
exercises and from the sale of its equity investments and other properties;
however, these sources of cash are neither relied upon nor controllable by the
Company. The Company has no long-term debt other than fixed capital lease
obligations and believes it has the ability to obtain additional financing if
necessary. At August 5, 2006, short-term investments and cash equivalents were
invested primarily in money market funds, high quality commercial paper with
original maturity dates of less than 270 days and investment grade corporate and
municipal bonds and other tax advantaged certificates with tender option terms
ranging
22
from one month to one year. Although management believes the Company's
short-term investment policy is conservative in nature, certain short-term
investments in commercial paper can be exposed to the credit risk of the
underlying companies to which they relate and interest earned on these
investments are subject to interest rate fluctuations. The maturities within the
Company's investment portfolio range from 30-180 days.
CASH REQUIREMENTS
The Company's principal use of cash is to fund its business operations,
which consist primarily of purchasing inventory for resale, funding account
receivables growth in support of sales growth and funding operating expenses,
particularly the Company's contractual commitments for cable and satellite
programming and the funding of capital expenditures. Expenditures made for
property and equipment in fiscal 2006 and 2005 and for expected future capital
expenditures include the upgrade and replacement of computer software and
front-end merchandising systems, expansion of capacity to support the Company's
growing business, continued improvements and modifications to the Company's
owned headquarter buildings and the upgrade and digitalization of television
production and transmission equipment and related computer equipment associated
with the expansion of the Company's home shopping business and e-commerce
initiatives. Historically, the Company has also used its cash resources for
various strategic investments and for the repurchase of stock under stock
repurchase programs but is under no obligation to do so if protection of
liquidity is desired. The Company has recently authorized a $10 million stock
repurchase program and has the discretion to repurchase stock under the program
and make strategic investments consistent with its business strategy.
The Company ended August 5, 2006 with cash and cash equivalents and
short-term investments of $74,895,000 and no debt and $139,000 of long-term
capital lease obligations. The Company expects future growth in working capital
as revenues grow beyond fiscal 2006 but expects cash generated from operations
to partially offset the expected use. The Company believes its existing cash
balances and its ability to raise additional financing will be sufficient to
fund its obligations and commitments as they come due on a long-term basis as
well as fund potential foreseeable contingencies. These estimates are subject to
business risk factors including those identified under "Risk Factors" in the
Company's fiscal 2005 Annual Report on Form 10-K. In addition to these Risk
Factors, a significant element of uncertainty in future cash flows arises from
potential strategic investments the Company may make, which are inherently
opportunistic and difficult to predict. The Company believes existing cash
balances, its ability to raise financing and the ability to structure
transactions in a manner reflective of capital availability will be sufficient
to fund any investments while maintaining sufficient liquidity for its normal
business operations.
Total assets at August 5, 2006 were $344,663,000, compared to $347,139,000
at February 4, 2006, a $2,476,000 decrease. Shareholders' equity was
$201,644,000 at August 5, 2006, compared to $202,871,000 at February 4, 2006, a
$1,227,000 decrease. The decrease in shareholders' equity for the six month
period ended August 5, 2006 resulted primarily from the net loss of $2,787,000
recorded during the six month period and accretion on redeemable preferred stock
of $144,000. These decreases were offset by increases in shareholders' equity of
$824,000 related to the recording of share-based compensation and $880,000 from
proceeds received related to the exercise of stock options.
For the six month period ended August 5, 2006, net cash used for operating
activities totaled $2,646,000 compared to net cash used for operating activities
of $5,824,000 for the six month period ended July 30, 2005. Net cash used for
operating activities for the six month periods ended August 5, 2006 and July 30,
2005 reflects the net loss, as adjusted for depreciation and amortization,
share-based payment compensation, common stock issued to employees, amortization
of deferred compensation, asset impairments and write off charges and gain on
sale of property and investments and equity in earnings of affiliates. In
addition, net cash used for operating activities for the six months ended August
6, 2006 reflects primarily an increase in accounts receivable, inventories and
prepaid expenses and other assets and a decrease in accounts payable and accrued
liabilities. Accounts receivable increased primarily due to an increase in
receivables from sales utilizing extended payment terms and the timing of
customer collections under the "ValuePay" installment program. Inventories
increased from year-end primarily as a result of increased sales, the Company's
effort to diversify its product mix offerings and the timing of merchandise
receipts as the Company prepares for its fall season. The decrease in accounts
payable and accrued expenses is a direct result of the timing of merchandise
receipts, amounts due to customers for returns and accrued cable access
payments, offset primarily by an increase in accrued marketing fees.
Net cash used for investing activities totaled $2,002,000 for the six
months ended August 5, 2006 compared to net cash provided by investing
activities of $277,000 for the six months ended July 30, 2005. For the six month
periods ended August 5, 2006 and July 30, 2005, expenditures for property and
equipment were $5,954,000 and $3,879,000, respectively. Expenditures for
property and equipment during the periods ended August 5, 2006 and July 30, 2005
primarily include capital expenditures made for the upgrade and replacement of
computer software and front-end ERP, customer care management and merchandising
systems, related computer equipment, digital broadcasting equipment and other
office equipment, warehouse equipment, production equipment and building
23
improvements. Principal future capital expenditures are expected to include the
upgrade and replacement of various enterprise software systems, continued
improvements and modifications to the Company's owned headquarter buildings, the
expansion of warehousing capacity, the upgrade and digitalization of television
production and transmission equipment and related computer equipment associated
with the expansion of the Company's home shopping business and e-commerce
initiatives. In the six months ended August 5, 2006, the Company invested
$7,427,000 in various short-term investments, received proceeds of $10,879,000
from the sale of short-term investments and received proceeds of $500,000 from
the sale of an Internet investment previously written off. In the six months
ended July 30, 2005, the Company invested $41,837,000 in various short-term
investments and received proceeds of $45,993,000 from the sale of short-term
investments.
Net cash provided by financing activities totaled $646,000 for the six
months ended August 5, 2006 and related primarily to cash proceeds received of
$872,000 from the exercise of stock options, offset by cash payments on
long-term capital lease obligations of $226,000. Net cash used for financing
activities totaled $90,000 for the six months ended July 30, 2005 and related
primarily to payments of long-term capital lease obligations of $325,000, offset
by cash proceeds received of $235,000 from the exercise of stock options.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments as a hedge to offset market risk. In past years, the Company has
held certain equity investments in the form of common stock purchase warrants in
public companies and accounted for these investments in accordance with the
provisions of SFAS No. 133. The Company no longer has investments of that
nature. The operations of the Company are conducted primarily in the United
States and as such are not subject to foreign currency exchange rate risk.
However, some of the Company's products are sourced internationally and may
fluctuate in cost as a result of foreign currency swings. The Company currently
has no long-term debt, and accordingly, is not significantly exposed to interest
rate risk, although changes in market interest rates do impact the level of
interest income earned on the Company's substantial cash and short-term
investment portfolio.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's
management conducted an evaluation, under the supervision and with the
participation of the Company's chief executive officer and chief financial
officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934). Based on this evaluation, the officers concluded that the
Company's disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Company's management, with the participation of the chief executive
officer and chief financial officer, performed an evaluation as to whether any
change in the internal controls over financial reporting (as defined in Rules
13a-15 and 15d-15 under the Securities Exchange Act of 1934) occurred during the
period covered by this report. Based on that evaluation, the chief executive
officer and chief financial officer concluded that no change occurred in the
internal controls over financial reporting during the period covered by this
report that materially affected, or were reasonably likely to materially affect,
the internal controls over financial reporting.
24
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on June 21,
2006. Shareholders holding an aggregate of 38,843,665 shares (common and
preferred shares), or approximately 91% of the outstanding shares, were
represented at the meeting by proxy or in person. The following matters were
submitted at the meeting for vote by the shareholders:
The shareholders present in person or by proxy cast the following numbers
of votes in connection with the election of directors:
FOR WITHHELD
---------- ---------
William J. Lansing 32,397,686 1,106,479
James J. Barnett 33,185,698 318,467
John D. Buck 32,090,401 1,413,764
Marshall S. Geller 32,762,132 742,033
Robert J. Korkowski 31,359,271 2,144,894
George A. Vandeman 33,132,120 372,045
Douglas V. Holloway * 5,339,500 --
Ronald J. Herman, Jr.* 5,339,500 --
Jay Ireland* 5,339,500 --
* Messrs. Holloway, Herman and Ireland are the representatives elected by the
holders of the Company's Series A Redeemable Convertible Preferred stock.
The shareholders present in person or by proxy cast the following numbers
of votes in connection with the ratification of the selection of Deloitte &
Touche LLP as the Company's independent registered public accounting firm for
the fiscal year ending February 3, 2007:
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- ---------- --------- ----------- ----------------
37,509,818 1,323,609 10,238 --
The shareholders present in person or by proxy cast the following numbers
of votes in connection with the amendment and restatement of the Company's 2004
Omnibus Stock Plan:
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- ---------- --------- ----------- ----------------
24,040,740 9,666,984 20,204 5,115,737
25
ITEM 6. EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- ----------------------------------------------------------------------
3.1 Sixth Amended and Restated Articles of Incorporation, as Amended. (A)
3.2 Certificate of Designation of Series A Redeemable Convertible
Preferred Stock. (B)
3.3 Articles of Merger. (C)
3.4 Bylaws, as amended. (A)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*
32.1 Section 1350 Certification of Chief Executive Officer.*
32.2 Section 1350 Certification of Chief Financial Officer.*
- ----------
* Filed herewith.
(A) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended August 31, 1994, filed on September 13,
1994, File No. 0-20243.
(B) Incorporated herein by reference to the Registrant's Current Report on Form
8-K dated April 15, 1999, filed on April 29, 1999, File No. 0-20243.
(C) Incorporated herein by reference to the Registrant's Current Report on Form
8-K dated May 16, 2002, filed on May 17, 2002, File No. 0-20243.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
September 14, 2006
/s/ William J. Lansing
----------------------------------------
William J. Lansing
Chief Executive Officer, President and
Director
(Principal Executive Officer)
September 14, 2006
/s/ Frank P. Elsenbast
----------------------------------------
Frank P. Elsenbast
Vice President Finance, Chief
Financial Officer
(Principal Financial Officer)
27
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT FILED BY
- ------- --------------------------------------------------------- -------------------------
3.1 Sixth Amended and Restated Articles of Incorporation, as Incorporated by reference
Amended
3.2 Certificate of Designation of Series A Redeemable Incorporated by reference
Convertible Preferred Stock
3.3 Articles of Merger Incorporated by reference
3.4 Bylaws, as amended Incorporated by reference
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Filed herewith
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Filed herewith
Officer
32.1 Section 1350 Certification of Chief Executive Officer Filed herewith
32.2 Section 1350 Certification of Chief Financial Officer. Filed herewith
28